Interest Rate: Understanding the Cost of Borrowing
May 30, 2019
How many consumers can honestly say that they have considered how high an interest rate is before signing a credit document? And not just to know what the interest rate is but to also consider how it will impact their repayments? The truth is that there are instances where this is rarely taken into consideration by consumers when taking loans, finally leading them to financial distress.
Unfortunately, it has become a common occurrence for the Council to receive consumer grievances regarding credit contracts being unfair and unreasonable because of exorbitant monthly repayments due to high interest rates. When high interest rates are charged, not only do consumers have difficulty keeping up with repayments, they also have difficulty in meeting other financial commitments. Paying a significant amount in interest means there is less money to go towards other expenses like food, utility bills, medical care and other necessities. This can cause extreme hardship to a family.
Therefore, it is vitally important that consumers consider the amount of interest they will be charged under credit agreements. These agreements include Home Loans, Car Loans, Unsecured Loans and even Hire Purchase Agreements. This will enable them to gauge whether they can pay the full amount under the agreement or whether they should perhaps seek an alternative option. Many financial institutions will disclose how they charge interest, and consumers should ensure that they understand how much money they will end up paying once the total interest is added to the principal amount.
The Council has noted in the past that financial institutions often charge interest rates irrespective of the loan amounts taken by consumers.
Unfortunately, the Council has come across cases where some consumers simply sign credit contracts in haste without understanding the terms and conditions of such contracts and the resulting implications. The result is that some consumers are left locked into contracts with high interest charges and in some cases default on payments.
Recently a consumer, Peni visited the Council for assistance with the crippling repayments he was making on his credit agreement. He had purchased a twin cab from Niranjans at a price of $68,000 and had his purchase financed by Kontiki Finance. He had managed to make a down payment of $9,000. During the documentation process, Kontiki Finance had charged Peni for Loan Protection Insurance of $5,038.73 and Comprehensive Insurance of $6776.52. In addition to this, the Company had clearly specified that the total interest he would repay was $68,055.95. In the credit agreement, the finance company had also quoted annual flat interest rate of 15% and an effective interest rate of 23.57% per annum. This interest amount was almost double the value of the twin cab that Bola had purchased. Therefore, in the Credit agreement, Peni was quoted a total repayment amount of $132,871.20. Peni was so eager to get his vehicle that he overlooked these extremely high interest charges.
After two years of making repayments, Peni was surprised when he started getting numerous reminders and default notices. Peni decided to check how much he still owed on the loan and finally noticed how deep in debt he was. During the two years, he had made a total repayment of some $34,000 but found out that he still had an outstanding loan account balance of $64,000. Peni was under the impression that he had been making his payments fairly quickly and was aiming to finish all his payments before the 5-year loan repayment term. When he started to receive the default notices, he quickly consulted a commercial bank and for the first time came to know the realities of his contract – that he would be paying more than double the amount of his purchase. Mr. Peni then attempted to get help from the Consumer Council, however, because he had already signed the credit agreement and was legally bound under it, he could not get a credit restructure.
His excuse that he did not read the contract before signing was not accepted by the company and he was unable to get redress for his issue.
The cost of not reading before signing the agreement was huge for Mr. Peni who unfortunately was stuck with a large repayment amount. The Council therefore advises consumer to ensure they fully read and understand the conditions of their loan contracts.
Consumers must know:
- Exactly what your repayments will be?
- What is the total amount you will repay?
- How much interest you will be charged on your borrowing?
- What is the interest rate?
- What are the hidden fees and charges?
- How interest is calculated?
- What are the penalties for non-payment or late payment of interest rates?
Further, consumers have to be mindful of how some finance companies calculate interest. The rates of these Finance Companies may seem attractively low, however, the actual method of calculations and the total amount a consumer would end up paying would be quite complex.
Consumers can also bring their credit contracts to the Consumer Council of Fiji if they need further clarification on the terms and conditions. Consumers can also call the National Consumer Helpline on Toll Free number 155 should they require further assistance.